On-the-spot incentives: spot bonuses can be a useful retention and motivational tool, especially during lean times

If the forecasts of job growth just ahead prove right, there could be trouble for some employers--the ones who haven't had to worry about turnover for a few years. Top performers might be lured elsewhere just when they're needed to help manage a company's growth and when the firm can't afford to match the offer from the other side of the fence.

That's when spot bonuses could help.

These relatively small, spur-of-the-moment gifts to employees, long used by some companies to recognize outstanding performance, are becoming increasingly popular as retention tools because their positive impact on employees can far outweigh their cost to the company.

Customarily, retention bonuses reward employees for staying for a defined period of time. But spot bonuses, some experts say, can serve as a secondary retention tool by cultivating a superior workplace environment, which in turn can boost recruiting efforts.

The use of spot bonuses generally spikes when traditional merit increases have been halted or sharply reduced, as they have been lately. Raises last year, for example, averaged 3.3 percent, one of the lowest rates in recent memory, according to the "U.S. Compensation Planning Study" by Mercer Human Resource Consulting of New York.

"Raises are sparse, and we're seeing an uptick in the employment market," says John Dantico, SPHR, a principal at The HR Group, a consulting company in Northbrook, Ill. "So today we're seeing the philosophy of spot bonuses slanted towards retention."

The scope of retention challenges that employers could face is indicated by findings in the 2003 "Job Recovery Survey" conducted by the Society for Human Resource Management (SHRM) in Alexandria, Va., and CareerJournal.com, a Wall Street Journal web site. According to the results, 64 percent of employees are "extremely likely" to seek new employment when the economy and the job market improve, and an additional 19 percent are "somewhat likely" to do so.

The general rule of thumb is that the top 10 percent of a company's workers can get 10 percent more money by going elsewhere, according to Bill Coleman, senior vice president at Salary.com, a compensation-management web site.

When the job market picks up, employers will look for inexpensive ways to prevent a mass exodus of workers, says Raylana Anderson, SPHR, director of HR for Clark Engineers in Peoria, Ill. Spot bonuses will be especially useful in what she calls the 'interim' period--after the economy heats up, but before formal responses like raises can be handed out. They may also benefit organizations that are so cash-strapped that big annual bonuses have never really been part of the picture.

Besides aiding retention, spot bonuses can be used to encourage overburdened employees. Take health workers, for example. "Major teaching hospitals in New York have employed [spot bonuses] as an inexpensive way to motivate people," says Janet Fuersich, leader of the rewards and management practice for consulting firm Towers Perrin of Stamford, Conn., noting that front-line nurses have tough jobs and very much need that kind of incentive.

But having a program on the books doesn't mean employers are actually using it.

Perhaps employers are beginning to catch on. In 2002, these programs saw a huge spike, with 55 percent of companies having a spot bonus program, up from a steady 40 percent in previous years, according to "Survey of Strategic Rewards and Pay Practices," a study conducted by HR consulting company Watson Wyatt Worldwide, based in Washington, D.C.

"I think they're one of the most underutilized forms of rewards, given how well employees respond to them," says Watson Wyatt's Lauren Sejen, practice director for strategic rewards. "These plans make perfect sense."

A Towers Perrin analysis, "Reward and Performance Management Challenges: Linking People and Results," found that 68 percent of firms with recognition programs offer spot bonuses, and an additional 9 percent are thinking about adding them within three years. "It's a growing trend to motivate employees and manage costs," says Fuersich. "Providing the reward so soon really engages the employee." (See the online version of this article for links to compensation studies.)

Making Spot Bonuses Work

If an employee's performance has been exceptional--such as filling in for a sick colleague, perhaps, or working nights or weekends or cutting costs for the company--the employer may reward the worker with a one-time bonus of $50, $100 or $500 shortly after the noteworthy actions.

"Your boss walking by and saying, 'That's a great job,' and showing up the next day with a check or gift certificate really underscores the specific thing you just did," says Salary.com's Coleman. That differentiates spot bonuses from more structured programs such as annual bonuses: While those larger yearly awards can be a crucial part of an over-all compensation package, annual bonuses are often distributed so long after the fact that employees have forgotten the impressive behavior for which they're being paid, he says.

Spot bonuses are not for the upper ranks. They are designed to motivate a broader-based group of employees: A $50 prize will have more impact on someone making a modest hourly wage than on someone with a six-figure salary. "When you get into senior management, there is a broader array of other reward plans," says Sejen.

Providing spot bonuses is a very low-cost initiative for companies; unlike base-pay increases or year-end bonuses, spot bonuses usually amount to no more than 0.5 percent of total payroll, and often even less at .25 percent, says Fuersich.

"Companies want to engage and motivate employees while still controlling costs," she points out. "Programs like spot bonuses allow them to not guarantee payout, but only pay it if some project really merits it."

But not all situations are alike, and that's why Fuersich recommends "tiering" as a solution. For example, one level of spot bonus might be $50, another might be $300 or $500, and yet another $1,000, depending on the particular circumstances and achievements. That gives managers additional flexibility. In fact, Dantico suggests to clients that spot rewards be quite large if the occasion demands it.

Don't feel obligated to burn through the funds, though, if you truly haven't seen results. For example, the president of Lake Federal bank in Hammond, Ind., has a $5,000 kitty to dole out at his discretion. "Some years he uses it fully and other years hardly at all," says Dantico. "So when it's awarded, it really means something."

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Make it purely results-oriented, not a management obligation. "Where you get into trouble is when you have an employee-of-the-month spot award, and once a month you have to find an employee to be that," says Sejen.

Timing is of the essence, though. If you don't deliver the payment within six weeks of the exemplary behavior, you could defeat the purpose, says Sejen. In fact, it can be especially useful at mid-year, when annual reviews and bonuses are six months away, but you want to recognize employees with a small but meaningful reward.

As beneficial as spot bonuses are, however, they shouldn't be doled out indiscriminately. "As the saying goes, if you recognize everyone, you recognize no one," says Coleman. Instead, keep the awards special by restricting them to 5 percent to 25 percent of the staff.

Spreading the Word

Just having a program in place is no guarantee of success. Its potential benefits could be lost if communications efforts are mismanaged. Experts say companies that give spot bonuses should:

* Make employees aware of the program and what it involves.

* Remind managers about the program.

* Publicize their colleagues' awards to all employees.

"Communication is a big issue," says Anderson. "If people hear about others getting them, that's another entry in the motivated-to-stay-here column. So it's important to let everyone know it's happening."

The notification can be low-key, such as a congratulatory e-mail sent to all staffers or a laudatory mention in an internal newsletter. Or it might be more over-the-top. For example, some financial institutions in New York City accompany the award with balloons, which are visible to the whole floor, Fuersich says.

A staffing company in Michigan doles out the awards at big company get-togethers, says Dantico. Managers slip five $100 bills into five envelopes and hand them out with great fanfare to the lucky winners. "It's usually a good idea to promote this, to celebrate this," he says.

Managing the Program

Implementing spot bonuses need not become an added burden for HR. Spot bonus programs are by their nature informal; they don't require a lengthy vetting process.

Only large companies will need to bring a consultant in to design and implement a program. Midsize or smaller companies can establish and run them on their own.

"Start simple, find out which amounts make sense, and set up some basic guidelines: It can be that simple," says Coleman. Less bureaucracy is better. However, do keep in mind that the IRS will want its cut. Some firms will "gross up" the award, whether it's paid by cash or check, making sure that a $100 reward is actually $100 after-tax.

However, that isn't to say a program requires no oversight. Some companies will grant the spot awards after a brief nomination-and-review process, but usually the only formal element is an annual or semi-annual review of the program. This occasional checkup is not only to evaluate the total funds allotted but also to ensure that managers are actually using the money.

Occasionally, out of habit or forgetfulness, departmental supervisors don't hand out the cash that's been made available. "Sometimes the program is already there, but they just don't use it," says Sejen. "So companies should do a usage analysis and get the message out that people ought to be doing more of this."

Anderson, for instance, has noticed it at Clark Engineers. "I see spot bonuses used occasionally, but not often," she says. "And managers have discretion to give out much more than that."

A risk with spot bonuses is that employees will become resentful if they see the program ignored in their department but used generously elsewhere in the company, or if they see managers awarding no spot bonuses because they want to show they can save the company money.

Instead, experts advise, use what you're given if the employees merit rewards and try to keep the application uniform across the company. Also, don't wait until the holidays to dole out spot bonuses, as many managers tend to do, because the awards might get mixed in and confused with other year-end bonuses. Keep spot bonuses apart from other rewards and very much tied to outstanding behavior.

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There are other potential pitfalls as well. For example, if your workplace is highly politicized, be wary of how much general good the bonuses will do. "If walking around handing out $100 bills is going to bring out claims of favoritism, you might not want to do it," says Coleman. But rather than scrapping the program entirely, he suggests, just make sure that the office "golden child" isn't always on the receiving end. He also warns that a program can fail if it becomes "overstructured and slow."

Experts also caution against thinking of spot bonuses as replacements for other types of compensation. The spot bonus is one tool, to be used in conjunction with others. This holistic approach will keep your top performers in the fold. "There are a number of different levers to motivate employees, and the better-performing companies use all of these," says Fuersich.

However, assuming they're handled effectively, spot bonuses "should be used often," Dantico says. Every company he has advised to adopt a spot bonus program has kept it going, because it delivers so much bang for the buck. "They're just an ideal tool."

Online Resources

Visit the online version of this article at www.shrm.org/hrmagazine/04May to review the following important additional information:

* Links to IRS tax guidelines for fringe benefits.

* Links to the compensation and employment outlook studies mentioned in this article.

* A recent HR Magazine article on how to use retention bonuses effectively.

In addition, to read an exclusive online excerpt from a new SHRM book, Managing Employee Retention, that describes how pay, benefits and other rewards can help you keep your best employees, visit www.shrm.org/books/04May.

RELATED ARTICLE: Better than Cash?

You don't necessarily have to use cash to award top performers, notes Bill Coleman, senior vice president of compensation at Salary.com, a compensation-management web site. Instead, employers can recognize their contributions with theater tickets, a prime parking space or anything else specifically targeted to the employee.

Keep in mind that tax regulations for non-monetary awards are tricky and are based on the individual case. Check out IRS publication 15-B, "Employer's Tax Guide to Fringe Benefits," to see if your particular gift is taxable. (See the online version of this article for a link to the IRS web site.)

"When I used to work at Watson Wyatt, they gave you a choice of five different awards," he says. "The value was the same, but that kind of personalization is a great way of truly recognizing the employee." At another employer, Coleman once had a boss who told him to expense his next plane ticket. "He knew I had a number of weddings to go to that summer," he says. "It comes across so much better than a standard gift because it showed he really knew who I was."

CHRIS TAYLOR IS A STAFF WRITER FOR SMARTMONEY MAGAZINE.

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